Lender’s new credit card is a debit card first

A company with deep roots in retail credit for consumers with subprime scores is piloting a debit card that can be converted to a credit card within 90 days, with few strings attached.

Atlanticus Holdings’ new Aspire Banking account offers consumers a debit card with a $500 minimum deposit. If account holders make responsible purchases without overdrawing the account for three consecutive months, their debit card may become a credit card. Users must keep their daily balance above $25 over three months to qualify for a credit card offer. 

Aspire, which is based in Atlanta, may sound like a close cousin of the growing array of fintech credit products, but it doesn’t tie up users’ funds with a deposit like a secured card or require any third-party proof of on-time payments to qualify for a general-purpose credit card, said Jeff Howard, president and CEO of Atlanticus.

“The customer only needs to use the debit account responsibly and after 90 days they get a guaranteed offer for a general-purpose credit card,” Howard said, noting that customers with low credit scores will receive limited credit lines at first, with the ability to get a bigger line based on payment behavior.

“This is the fourth recession we’ve seen,” said Jeff Howard, president and CEO of Atlanticus Holdings, which is targeting underbanked consumers with Aspire Banking.

To transform the card into a credit card offer, customers must do the following for three consecutive months within the first year of opening the account: deposit $500 a month, including the initial deposit, and make three debit purchases that post and settle within the same statement cycle. There are no fees if customers fail to meet the requirements. 

Aspire targets unbanked and underbanked consumers with credit scores below 680, and Bank of Missouri is extending the loans through a banking-as-a-service relationship. Atlanticus will immediately buy the credit card receivables from the Perryville, Missouri-based bank, according to Howard.

“We provide the analytics engine and funding mechanism to the bank, which makes the credit card offers. Then we buy the loans back from the bank so they don’t have to carry less-than-prime receivables on their balance sheet,” Howard said.

Extending credit card loans to subprime borrowers, especially based on such a short period, carries higher risks, Howard acknowledges. But unlike many fintech operators getting into credit-building products, Atlanticus has deep experience working in the subprime sector.

The company’s Fortiva subsidiary since 2010 has offered so-called “second look” offers to consumers who have low credit scores but need  credit for home improvement and other big-ticket purchases. Fortiva Retail Credit earlier this year renewed a multiyear partnership with the 125-store American Signature Furniture chain based in Columbus, Ohio.

While secured cards have been around for years, Howard says their appeal is waning for consumers because their terms are more complicated.

Capital Bank in Rockland, Maryland, reported declining customer acccounts and falling deposits among its secured credit cards this year, as fintechs step up competition for alternative credit products.

In the tightening economy, products designed for borrowers with shaky credit will have their work cut out, said Brian Riley, director of Mercator Advisory Group’s credit advisory service.

“You’re not going to see a lot of top-line lenders getting into inclusive lending in the middle of a recession, and while that means there may be pockets of opportunity for players like Aspire, it’s still very risky,” Riley said.

Aspire may adjust the product’s initial requirements if they prove too risky, Howard said.

“We know this market of lending to underbanked consumers better than a lot of startups, but now we’re using new data-aggregation tools and banking-as-a-service platforms for a fresh approach,” he said.

Atlanticus has created a set of APIs for its method of converting debit accounts into credit card offers, Howard said. 

In addition to the debit account that can be converted to a credit account, Aspire’s app provides users with a dashboard with tools to access their credit score and track their spending. Bill payment and money-transfer services are on the road map.

Howard, who has been working for Atlanticus for more than two decades, and previously was CEO of its Fortiva subsidiary, also spent eight years as a managing director at SunTrust.

“This is the fourth recession we’ve seen during my career and Atlanticus is in a better position to know how to work with the underbanked and credit-challenged consumer than many operators because of our experience,” Howard said.

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